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Fixed-Price
Economic Price
Fixed-Price
Firm Fixed-Price
Adjustment
Incentive Firm
(FFP)
(FPEPA)
(FPIF)
Principal
Risk to be
Mitigated
Use When..
Elements
The market
prices at risk are
severable and
significant. The
risk stems from
industry-wide
contingencies
beyond the
Contracto contractor's
control. The
rs are
experienc dollars at risk
outweigh the
ed in
meeting administrative
burdens of an
it.
FPEPA.
The
requirem
ent is
welldefined.
A ceiling price
can be
established that
covers the most
probable risks
inherent in the
nature of the
work. The
proposed profit
sharing formula
would motivate
the contractor to
control costs to
and meet other
objectives.
Market
condition
s are
stable.
Fixed-Price
Award-fee
(FPAF)
Risk that the
user will not be
fully satisfied
because of
judgmental
acceptance
criteria.
A fixed-price,
ceiling on
upward
adjustment, and
a formula for
adjusting the
price up or down
based on:
Establis
hed
prices.
Actual
labor or
material
costs.
The Government
needs a firm
commitment
from the
contractor to
deliver the
supplies or
services during
subsequent
years. The
Provide
dollars at risk
a
outweigh the
meanin
administrative
gful
burdens of an
incentiv
FPRP.
e.
Justify
related
adminis
trative
burdens
.
A
ceiling
price
A firm
fixedprice.
Target
cost
Standar
ds for
evaluati
ng
perform
ance.
Target
profit
Delivery
,
quality,
and/or
other
perform
ance
Costs of
performance
after the first
year because
they cannot be
estimated with
confidence.
Judgmental
standards can
be fairly applied
by an Award-fee
panel. The
potential fee is
large enough to
both:
Financial
risks are
otherwise
insignifica
nt.
A firm fixed-price
for each line item
or one or more
groupings of line
items.
Fixed-Price
Prospective
Redeterminati
on (FPRP)
Procedu
res for
calculati
ng a fee
based
on
Fixedprice
for the
first
period.
Propose
d
subseq
uent
periods
(at
least 12
months
apart).
targets
(option
al)
Labor
or
material
indices.
Contractor is Provide an
Obliged to: acceptable
deliverable at the
time, place and
price specified in
the contract.
Provide an
acceptable
deliverable at
the time and
place specified in
the contract at
the adjusted
price.
Profit
sharing
formula
Provide an
acceptable
deliverable at
the time and
place specified in
the contract at
or below the
ceiling price.
Fixed-Price
Economic Price
Fixed-Price
Firm Fixed-Price
Adjustment
Incentive Firm
(FFP)
(FPEPA)
(FPIF)
perform
ance
against
the
standar
ds
Perform at the
time, place, and
the price fixed in
the contract.
Fixed-Price
Award-fee
(FPAF)
Timetab
le for
pricing
the
next
period(s
).
Provide
acceptable
deliverables at
the time and
place specified in
the contract at
the price
established for
each period.
Fixed-Price
Prospective
Redeterminati
on (FPRP)
Contractor
Incentive
(other than
maximizing
goodwill) 1
Generally realizes
an additional
dollar of profit for
every dollar that
costs are reduced.
Generally
realizes an
additional dollar
of profit for
every dollar that
costs are
reduced.
Realizes a higher
profit by
completing the
work below the
ceiling price
and/or by
meeting
objective
performance
targets.
Generally
realizes an
additional dollar
of profit for
every dollar that
costs are
reduced; earns
an additional fee
for satisfying the
performance
standards.
Typical
Application
Commercial
supplies and
services.
Long-term
contracts for
commercial
supplies during a
period of high
inflation
Production of a
major system
based on a
prototype
Perfromancebased service
contracts.
Long-term
production of
spare parts for a
major system.
Must be
justified.
Must be
Must be
justified. Must
negotiated.
be negotiated.
Contractor must
Generally NOT
Principal
Limitations appropriate for
in FAR Parts
16, 32, 35,
MUST be
negotiated.
Contractor must
have an
and 52
R&D.
have an
adequate
accounting
system. Cost
data must
support targets.
adequate
accounting
system that
supports the
pricing periods.
Prompt
redeterminations
.
Variants
Firm Fixed-price
Level of Effort.
Successive
Targets
Retroactive
Redetermination
Principal Risk to
be Mitigated
Cost-Plus
Award-Fee
(CPAF)
Cost-Plus
Fixed-Fee
(CPFF)
Cost or
CostSharing
(C or CS)
Highly uncertain and speculative labor hours, labor mix, and/or material
requirements (and other things) necessary to perform the contract. The
Government assumes the risks inherent in the contract -benefiting if the actual cost
is lower than the expected cost-losing if the work cannot be completed within the
expected cost of performance.
Use When..
An objective
relationship can
be established
between the fee
and such
measures of
performance as
actual costs,
delivery dates,
performance
benchmarks,
and the like.
Objective
incentive targets
are not feasible
for critical aspects
of performance.
Judgmental
standards can be
fairly applied.1
Potential fee
would provide a
meaningful
incentive.
Relating
fee to
performan
ce (e.g., to
actual
costs)
would be
unworkabl
e or of
marginal
utility.
No other type
of contract is
The
suitable (e.g.,
contractor
because costs
expects
are too low to
substantia
justify an audit
l
of the
compensa
contractor's
ting
indirect
benefits
expenses).
for
absorbing
part of
the costs
and/or
foregoing
fee or
The
vendor is
a nonprofit
entity
Target
cost
If CS, an
agreemen
t on the
Governme
nt's share
of the
cost.
No fee
Elements
Target
cost
Target
cost
Perfor
mance
targets
(option
al)
Standard
s for
evaluatin
g
performa
nce
A
minimu
m,
maxim
um,
and
target
fee
Contractor is
Obliged to:
A
formul
a for
adjusti
ng fee
based
on
actual
costs
and/or
perfor
mance
A base
and
maximu
m fee
Procedur
es for
adjusting
fee,
based on
performa
nce
against
the
standard
s
T
a
r
g
et
c
o
st
Fi
x
e
d
fe
e
A
ceiling
price
A perhour
labor
rate
that
also
covers
overhe
ad and
profit
Provisi
ons for
reimbu
rsing
direct
materi
al
costs
Make a good
faith effort to
meet the
Government's
needs within
the ceiling
price.
Contractor
Incentive (other
than maximizing
goodwill)1
Realizes a
higher fee by
completing the
work at a lower
cost and/or by
meeting other
objective
performance
targets.
Realizes a
higher fee by
meeting
judgmental
performance
standards.
Principal
Limitations in FAR
Parts 16, 32, 35,
and 52
Realizes a
higher rate
of return
(i.e., fee
divided by
total cost)
as total
cost
decreases.
Research
study
Variants
Completion
or Term.
Emergency
repairs to
heating plants
and aircraft
engines.
Labor rates
must be
negotiated.
MUST be
justified. The
Government
MUST exercise
appropriate
surveillance to
ensure efficient
performance.
Labor Hour
(LH)
There is serious doubt concerning the stability of market or labor conditions that
will exist during an extended period of contract performance.
Volatility of the markets for labor and material. The more volatile the
market, the greater the benefits that can be derived from FPEPA
utilization.
Projected contract period. The longer the contract, the greater the
contractor's exposure to an uncertain market. FPEPA contracts are
normally not used for contracts that will be completed within six months
of contract award.
The amount of competition expected. If markets are truly volatile, many
firms may be unwilling to submit an offer without EPA protection.
Dollar value of the contract. The greater the cost risk to the contractor, the
greater the benefits that can be derived from an FPEPA contract. In the
DoD, adjustments based on actual labor or material cost are generally not
used for contracts of $50,000 or less (DFARS 216. 203-4(c)).
You must not use an FPEPA contract unless you have determined that it is necessary for
one of the following reasons.
To provide for contract price adjustment in the event of changes in the contractor's
established prices.
Fixed Price Award Fee (FPAF). (FAR 16.404(a) and DFARS 216.470) You may use
award-fee provisions in fixed-price contracts when the Government wishes to motivate a
contractor and other incentives cannot be used because contractor performance cannot be
measured objectively. Such contracts must:
Establish a fixed price (including normal profit) for the effort. This price will be
paid for satisfactory contract performance. Award fee earned (if any) will be paid
in addition to that fixed price.
Provide for periodic evaluation of the contractor's performance against an awardfee plan
An individual above the level of the contracting officer approved the fixed-priceaward-fee incentive
Fixed Price Incentive Fee (FPIF). (FAR 16.403 and 16.403-1(b)) A fixed-price incentive
contract is a fixed-price type contract with provisions for adjustment of profit. The final
contract price is based on a comparison between the final negotiated total costs and the
total target costs. A FPIF contract is appropriate when:
The nature of the supplies or services being acquired and other circumstances of
the acquisition are such that the contractor's assumption of a degree of cost
responsibility will provide a positive profit incentive for effective cost control and
performance
The parties can negotiate (at the outset) a firm target cost, target profit, and profit
adjustment formula that will provide a fair and reasonable incentive and a ceiling
that provides for the contractor to assume an appropriate share of the risk.
FPRP Contract Type (FAR 16.205-1) A FPRP contract provides for a firm fixedprice for an initial period of contract deliveries or performance and prospective
price redetermination at a stated time or times during contract performance for
subsequent periods. It can probably be best described as a series of firm fixedprice contracts negotiated at stated times during performance. You should
consider an FPRP contract for acquisitions of quantity production or services for
which you can negotiate a fair and reasonable firm fixed-price for the initial
period, but not for subsequent periods of contract performance. In the DoD,
FPRP contracts are frequently used for aircraft engine acquisition, where the
nature of manufacture and resulting methods of accounting for costs lend
themselves to periodic, plant-wide pricing on a prospective basis. The FPRP
contracts have two key elements:
Firm fixed-price for an initial period of contract deliveries or performance.
Stated time or times for price redetermination.
They generally also have a third element, a ceiling price. In negotiating a ceiling
price you should consider the uncertainties involved in contract performance and
their cost impact. This ceiling should provide for assumption of a reasonable
proportion of the risk by the contractor and, once established, may be adjusted
only by operation of contract clauses providing for equitable price adjustment or
other revision of the contract price under stated circumstances. Consider the
following points when you negotiate and administer an FPRP contract.
The initial period for which the price is fixed at the time of contract
negotiation should be the longest period for which it is possible to
establish a fair and reasonable firm fixed-price.
The length of the prospective pricing periods will depend on the
circumstances of each contract but generally should be at least 12 months.
The prospective pricing period(s) should conform with the operation of the
contractor's accounting system. They can be described in terms of units
delivered, or as calendar periods, but generally are defined to end on the
last day of a month. The first day of the succeeding period must be the
effective date for the price redetermination. At a specified time before the
end of each redetermination period prior to the last, the contractor is
required to submit:
The data must be sufficient to disclose unit cost and cost trends for:
o Supplies delivered and services performed
o Inventories of work in process and undelivered contract
supplies on hand (estimated to the extent necessary).
The data format must meet the requirements of the contract, the
law, and applicable regulations.
The contractor must also submit (to the extent that it becomes available
before negotiations on price redetermination are concluded):
If the contractor fails to submit the data required within the time periods specified,
the contracting officer may suspend contract payments until the data are
submitted. If it is later determined that the Government overpaid the contractor,
the contractor must repay the Government immediately. Unless repaid within
30 days after the end of the data submittal period, the amount of the excess must
bear interest - computed from the date the data were due to the date of
repayment - at the rate established in accordance with the Interest clause of the
contract.
Upon receipt of the data required, negotiate to redetermine fair and reasonable
prices for the supplies and services that may be delivered in the period
following the effective date of the price redetermination.
Formalize each price redetermination in a bilateral contract modification.
Pending execution of the bilateral contract modification, the contractor will
submit invoices or vouchers in accordance with the billing prices established in
the contract.
If at any time it appears that the then-current billing prices will be
substantially different than the estimated prices, negotiate an
appropriate change in the billing price.
Any billing rate adjustment must be reflected in a contract
modification, but it must not affect price redetermination.
If the CCO and the Contractor fail to agree on redetermined prices for any price
redetermination period within 60 days (or within such other period as the parties
agree) after the date on which the above data are to be submitted, the contracting
officer must promptly issue a decision in accordance with the Disputes clause. If
the contractor fails to appeal, this decision must be treated as an executed contract
modification, unless modified by agreement with the contractor.
Quarterly -- during periods for which prices have not been established, costs have
been incurred, and adjusted billing prices exceed the existing contract price -- the
contractor must submit cumulative data showing:
Total contract price for all supplies and services delivered and
accepted by the Government for which final prices have been
established.
Ceiling price negotiated for the contract at a level that reflects a reasonable
sharing of risk by the contractor. The established ceiling price may be
adjusted only if required by the operation of contract clauses providing for
equitable price adjustment or other revision of the contract price under
stated circumstances.
Contract requirements are similar to those for an FPRP contract except that price
is not redetermined until all items are delivered. However, you should consider
two additional points as you negotiate and administer an FPRR contract.
When you negotiate the contract, you should emphasize the importance of
management effectiveness and ingenuity in contract performance will be
considered during final pricing. This emphasis is important because this contract
type does not provide the contractor with a calculable incentive for effective cost
control, aside from the cost ceiling.
When you negotiate the redetermined contract price, you should give
weight to the management effectiveness and ingenuity exhibited by the
contractor during performance.
Do not require the contractor to complete the required contract effort within an
agreed-to maximum price; and
Pay the contractor for actual hours worked
overhead, general and administrative expenses, and profit. Materials are priced at cost,
including (if appropriate) material handling costs. A time and materials contract affords
the contractor no positive profit incentive to control material or labor costs effectively.
Yet this contract type is often the only effective one for repair, maintenance, or overhaul
work to be performed in emergency situations. A time and materials contract may be
used only after the CCO executes a written determination and finding that no other
contract type is suitable. When the contract includes a ceiling price, its breach is at the
contractor's risk. If the ceiling price is subsequently raised through a contract
modification, the contract file documentation must justify the increase. Although the
agreed upon hourly rate per direct labor hour is an important source selection factor, the
contractor's technical and managerial skills are more important, to include his reputation
for getting the job done. The contractor will get paid for hours and materials expended.
Therefore, awarding to a marginal producer that charges a cheaper price per hour but
expends more hours due to its ineffectiveness may not be the most beneficial solution.
Cost-Reimbursement Contracts. (FAR 16.302) Cost-reimbursement contracts are
generally labor intensive and require additional scrutiny in regards to the contractors cost
accounting system. As such, these types of contracts are generally large dollar, external
support type contracts. Generally the CCO will not be involved in cost-type efforts;
unless deployed as an ACO with DCMA or deployed into security, sustainment,
transition, and reconstruction (SSTR) activities. Under a cost-reimbursement contract,
the contractor agrees to provide its best effort to complete the required contract effort.
Cost-reimbursement contracts provide for payment of allowable incurred costs, to the
extent prescribed in the contract. These contracts include an estimate of total cost for the
purpose of obligating funds and establishing a ceiling that the contractor cannot exceed
(except at its own risk) without the approval of the contracting officer. Contract types in
this category include:
Cost (CR)
Cost-sharing (CS)
Cost-plus-fixed-fee (CPFF)
Cost Incentives. Most incentive contracts include only an incentive for controlling
cost. You cannot provide for other incentives without also providing a cost
incentive or constraint.
delays beyond the control and without the fault or negligence of the contractor or
subcontractor.
If you use multiple incentives, structure them in a manner that compels trade-off
decisions among the incentive areas. Be careful to avoid using too many incentives. If
there are too many incentives, it may be impossible for the contractor to logically
consider the trade-offs available and determine the effect on profit/fee.
CPIF Contract. (FAR 16.405-1(b) A cost-plus-incentive-fee contract is appropriate for
noncommercial service or development and test programs when:
The parties can negotiate a target cost and a fee adjustment formula that are likely
to motivate the contractor to manage effectively.
The fee adjustment formula should provide an incentive that will be
effective over the full range of reasonably foreseeable variations from
target cost.
If a high maximum fee is negotiated, the contract shall also provide for a
low minimum fee that may be a zero fee or, in rare cases, a negative fee
The contract may include technical performance incentives when it is highly
probable that the required development of a major system is feasible and the
Government has established its performance objectives, at least in general terms.
Do not use a CPIF contract unless:
The contractor's accounting system is adequate for determining costs
applicable to the contract; and
Appropriate Government surveillance during performance will provide
reasonable assurance that efficient methods and effective cost controls are
used.
The differences between the CPIF and FPIF pricing arrangements occur when contract
costs are substantially above or below target cost. The CPIF contract pricing arrangement
must include a minimum fee and a maximum fee that define the contract range of
incentive effectiveness (RIE). When costs are above or below the RIE, the Government
assumes full cost risk for each additional dollar spent within the funding or cost limits
established in the contract. Consider the following final steps when developing a CPIF
pricing arrangement.
Award-Fee Contract. (FAR 16.405-2(a) An award-fee contract is a form of incentive
contract. Unlike the FPIF or CPIF contract, the award-fee contract does not include
predetermined targets and automatic fee adjustment formulas. Contractor performance is
Situations for CPAF Contract Use. (FAR 16.405-2(b)(1) Consider a CPAF contract when
the following conditions exist:
Any additional administrative effort and cost required to monitor and evaluate
performance are justified by the expected benefits.
Your agency may provide additional restrictions. For example, DoD personnel must not
use a CPAF contract:
To avoid establishing a CPFF contract when the criteria for a CPFF contract apply
or developing objective targets so that a CPIF contract can be used.